1. Field of the Invention
The present invention generally relates to computer implemented forecasting tools and, more particularly, to a tool for forecasting the spot-market prices of electric power and the trading transactions at different delivery points.
2. Background Description
Electricity is an essential part of our lives. If we took a moment to think of the services that would not exist if electricity were not available, we would be amazed. Almost every aspect of our modern lives involves electric power, from light bulbs and television sets to hospitals and automobile industries. Although we are used to having power whenever we need it, the processes and systems involved in delivering electricity require careful planning and sophisticated mathematical and forecasting models.
Lately, due to rising costs of energy and discrepancies in its price among different regions of the country, the legal framework surrounding the electric-power industry has changed. This change has opened the door for utilities to compete with each other and against independent suppliers regardless of their geographic location. Although this change will benefit the consumer, utilities are going to face a highly unpredictable market and will need to make tough decisions regarding power generation and delivery.
The power industry is going through deregulation. The current picture of a single utility controlling the market in a specific region will soon disappear. Instead, there will be power producers who sell their product to a power pool; and power suppliers who will buy power from this pool and in turn sell it to their customers. Although the full picture of the power industry after deregulation is not yet known, it is clear that utilities need to prepare themselves for an open market in which buying and selling power are to be considered when scheduling their generating units.
The main reason behind deregulation is to reduce the high price of electric energy. Initial steps towards deregulation were taken in 1978 with the passage of the Public Utilities Regulatory Policy Act. This act encouraged nonutility generation and required utilities to buy power from independent generators. The Energy Policy Act of 1992 took deregulation a step further by mandating open access to the transmission system for wholesalers.
Currently, electricity is sold as a service that is delivered to specified points. For example, each one of us expects to receive electric power via a meter outside the house. We pay for this service regardless of its producer or which power lines it followed. That is, an electricity bill indicates the total usage of electricity in kilowatt hours (KWH) and the service price per KWH without incorporating any other details into the pricing scheme. Deregulation is changing this picture by unbundling the electric power into generation and transmission. In the future, one will pay a production cost and a transmission fee. There will be several power suppliers from whom electric power may be purchased. Suppliers may have different pricing mechanisms. For instance, there might be a discount for using power off-peak periods or for signing a long-term contract with the supplier. Power producers will compete with each other to minimize their costs so that they can sell their product to more customers and maximize their profit.
The hope is that deregulation will result in cheaper prices and play a part in improving the economy by encouraging investments in electric utilities. The size of the electric industry is expected to grow after deregulation as was the case with the telecommunications industry. The telecommunications industry's revenue shot up from $81 billion to $170 billion within ten years of deregulation.
A pitfall of deregulation is that the load on a utility system is becoming increasingly unpredictable. The reason is that trading transactions can change the load pattern significantly. For example, some utilities may sell more than 30% of their power generation to other utilities on certain days. Demand and supply in the market are functions of volatile electricity prices which in turn depend on highly unpredictable elements such as regional weather conditions and fuel prices.
There are two components for any competitive environment: physical and commercial. In the case of electricity, the physical component already exists in the form of transmission lines and all consumers have physical access to the market. The commercial component consists of the ability of buyers and suppliers to execute trades over the physical network. One should also ensure that anyone who is interested in joining this market has non-discriminatory access to the physical network. In this environment, suppliers and consumers have the freedom to contract with each other under negotiated terms and conditions. To ensure the delivery of the power traded, they need a mechanism to ensure the physical delivery of the electricity. Also, they may need to rely on a spot market to buy or sell additional electricity.
Although the new environment encourages competition, power transmission will remain regulated for the time being in order to maintain a reliable system. The transmission lines in each state or region will be controlled by an independent entity called Independent System Operator or ISO. One of the ISO responsibilities is to settle financially with the parties involved in transmitting electric power. The transmission cost depends on the proximity of the supplier and the congestion of the transmission lines as well as other operational factors. To maintain a reliable system, ISO announces, twenty-four hours in advance, the load forecast on the system and asks interested suppliers to submit bids; i.e., amount of power to be delivered at each point and pricing information. The load forecast is given for each delivery point within the physical system.
Bids are submitted to the Power Exchange or PX which then holds an auction to determine which suppliers to buy power from. For each delivery point, the PX chooses the least expensive source of power, then the second least expensive, and so on. The process is repeated until the forecasted load on the system is met. Note that the previous process ensures that the customers' need for electricity is satisfied at a minimal cost. The bidding cost of the last supplier chosen in the bidding process is the spot-market price for power at this delivery point. The PX performs this process for each delivery point in the system and at each hour of the day.
After agreeing on the production schedule, the ISO studies the schedule to make sure that it is feasible; i.e., it does not exceed the capacity of the transmission lines. Transmission charges are a function of the congestion of the power lines. These charges are calculated by ISO and billed to the different parties involved in trades.
Note that suppliers who submit a bid with a high price may end up not selling any of their production. On the other hand, selling power at a low price may not create enough revenue for a generator. Given that no one knows in advance the amount of power that competitors may bid for, the electric-power market will become more uncertain and risky. The hope is that competition will force utilities to minimize their production costs which will, in turn, benefit consumers and the economy in general. The previous model also encourages individuals to invest money in the electric-power market. For instance, if the charges across a certain power line are relatively high due to congestion, an investor could build an alternative power line in the hope of benefitting from the high-traffic in that region. The result, of course, is a reduction in the transmission cost in that region and an increase in the reliability of the system.